Direct Nexus between Interest Expenditure Claimed and Interest Income Earned Proved: ITAT Allows Deduction Against Expenditure on ‘Income from Other Sources ‘ [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) held that the interest expenditure claimed by the assessee is directly related to the interest income earned during the year under consideration, thus allowed the deduction under Section 57(iii) of Income Tax Act,1961 on ‘income from other sources’.

 The assessee M/s. Airmid Developers Limited is a company and is engaged in the business of developing, constructing, and dealing in real estate, properties, and construction. For the year under consideration, the assessee filed its return of income, declaring a total income of Rs.44,66,074. The return filed by the assessee was selected for scrutiny and statutory notices under Section 143(2) as well as Section 142(1) of the Income Tax Act were issued and served on the assessee.

The Assessing Officer(AO), vide draft assessment order, observed that during the year under consideration, the assessee had surplus funds at its disposal and the same were advanced as interest-bearing loans to the sister concerns.

The AO further observed that the interest income of Rs.6,82,61,252, has been offered to tax under the head “income from other sources” and the said amount has been reduced by the interest expenditure incurred for earning the interest income under Section 57(iii) of the Income Tax Act.

The AO, vide draft assessment order proposed to tax the interest of Rs.6,82,51,252, earned by the assessee under the head “income from other sources” and disallowed the deduction claimed under Section 57(iii) of the Income Tax Act.

The AO further held that the assessee has used the funds for the purpose for which it has not been raised or brought in India and thus the same is in gross violation of the RBI guidelines.

Against the aforesaid findings, the assessee filed detailed objections before the Dispute Resolution Panel (DRP)

The DRP directed the AO to allow the deduction of interest expenditure of Rs.10,25,58,218, under Section 57(iii) of the Income Tax Act against the interest income of Rs.6,82,61,252, offered by the assessee as income from other sources. In conformity, the AO passed the impugned final assessment order assessing the total loss at Rs.1,66,07,837.

Being aggrieved the Revenue filed an appeal before the Tribunal

The Two Member Bench comprising of Prashant Maharishi, Accountant Member and  Sandeep Singh Karhail, Judicial Member observed that It is undisputed that the assessee,during the year under consideration, utilised the said borrowed funds for giving loans to sister concerns and earned interest income therefrom amounting to Rs.6,82,61,252.

It was noted that In its return, the assessee duly offered the interest income of Rs.6,82,61,252 to tax under the head “income from other sources” and restricted the claim of deduction under Section 57(iii) of the Income Tax Act to the extent of income offered. On the other hand, as per the AO, the funds were borrowed for the purpose of real estate projects of the assessee and the interest cost incurred thereon has no connection with the interest income earned by the assessee.

Therefore, under Section 57(iii) of the Income Tax Act, any expenditure which is not in the nature of capital expenditure and has been expended wholly and exclusively for the purpose of earning income chargeable under the head “income from other sources” is allowable as a deduction.

The Bench found that the DRP after duly noting the chronology of events, i.e. borrowing of interest-bearing funds by the assessee and thereafter advancing the same as interest-bearing loan to the sister concern,  came to the conclusion that the interest expenditure claimed by the assessee is directly related to the interest income earned during the year under consideration.

Further, it is pertinent to note that the violation of RBI guidelines on the usage of External Commercial Borrowings (ECB) funds for other purposes has no relevance in the allowance of deduction under section 57(iii) of the Income Tax Act.

Therefore, the impugned final assessment order passed in conformity with the directions of the DRP, whereby the interest expenditure of Rs.10,25,58,218, was directed to be allowed under section 57(iii) of the Income Tax Act against the interest income offered for taxation under the head “income from other sources” was upheld.

Hence this ground raised in the appeal by Revenue was dismissed.

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